Question

Zero growth: Ron Santana is interested in buying the stock of First National Bank. While the bank's management expects no growth in the near future, Ron is attracted by the dividend income. Last year the bank paid a dividend of $5.65. If Ron requires a return of 14 percent on such stocks, what is the maximum price he should be willing to pay for a share of the bank's stock?

Answer 1

Step 1 Value of stock

Dividend discount model

Stock value= dividend/(Required return-growth rate)

Step 2

Growth rate and required rate

Growth rate= 0

Required rate= 14%

Step 3

value of stock

Value = 5.65/(0.14-0)

= 40.35

Answer = 40.35

Answer = 40.35